Common Reasons Why Small Businesses Fail

As a former business advisor, and current business writer, I have seen dozens of reasons why small businesses fail. This list is a compilation of the most common reasons why small businesses fail, and how to avoid these failures.

Over-Valuing Ability as a Businessperson

One of the most common reasons why small businesses fail is due to an owner who believes that he or she is one of the best business minds in the world. While a small business owner needs self-confidence to succeed, arrogance will cause a small business to fail.

Not Having Enough Capital

While we hear stories of companies that started for only a few dollars, these stories run against the grain. Just because someone else was able to start a business for a small amount doesn't mean that you can. Starting with the proper amount of capital would have saved many failed small businesses.

Not Having a Strong Business Plan

All businesses, especially small businesses, need a strong business plan. Many small businesses fail due to the fact that the owner never came up with a business plan. Other small businesses fail due to the fact that the owner did not come up with a strong enough business plan. The business plan sets the barriers for the business and sets the initial direction.

Not Planning All Aspects Before Opening

I cannot count the number of times that I have seen small business owners start out without distribution partners, product lines, payroll services or some other aspect of business that should have been planned long before. Starting a business like this is like starting a race fifty feet behind the starting line.

Entering an Inundated Business Market

A high number of small businesses fail because owners see markets that are gaining popularity, and decide to jump in. Often, up-swinging markets are over-inundated and have no room for anyone else.

Over-Diversifying

Strip malls all over are filled with empty stores that used to house companies that tried to over-diversify. Small businesses are destined to fail if the owner wants to carry dozens of different types of products, or take the small business in a handful of different directions.

Putting Employees Before the Business

Employees are one of the most important aspects of any business. Many small businesses fail, though, because owners put the needs of the employees before the needs of the overall business. While it might be nice to pay your employees a high wage, it should not be at the expense of the bottom line.

Fixes to These Problems

I had a business professor that stated, "Fewer small businesses would fail if owners took basic business classes." Years later, I find myself agreeing with this statement. Basic businesses classes will teach you how to pick out what markets to get in to, how to balance your payments, how to create a strong business statement and stick to it, and how to plan through ever step of your small business's life.